Market outlook for short term (26-11-09): Be and make

Markets rallied strongly in 2009 and were trading at 52 week highs. Now, what to do? My two long term bullish calls to build the portfolio were absolutely fetched great returns. Those who were with the calls now can book profits partially according to their risk appetite.

Markets now trading at 52 week high and now the big question is whether we are going to see the ‘all time highs’ or ‘52 week lows’ or ‘a consolidated range’?
In my view, markets going to have another wave of strong correction when viewed fundamentally! The magnitude of the correction is also more than 20% for sure.

Why this correction is going to happen?

Globally all economies re-bounding strongly and IMF too forecasted a positive growth numbers for the major economies in 2010. Everybody feeling that worst is over and new leg of Bull Run is likely to come globally. Then its really worth to say that worst is over? In my view, based on the following is issue I can say that upside for the market is capped from the current levels. So, we can not see and big upsurge in the broader indices in the medium term.

The following are the main reasons for my bearish medium term call:
1. Now, the markets are trading at ‘fair price multiple’ and history too suggest that whenever markets trading above the average PE of 15-17 we can expect some correction. So, the question is this PE must come to the lower level of the historical averages. How, it comes to lower end of the range? Answer is very simple means, either earnings (EPS) upgrade should come or equity should be minimal.
At this point both are not favoring! Globally the real wondering factor at this point of time is ‘higher commodity prices’. Despite the strong global recession commodity prices are not down! In case of the Agri commodities the picture very bleak. Higher commodity prices always a big negative factor for the earnings and we are going to face that threat for the earnings upgrade.
The second one is about the interest rates, yes in the upcoming quarters we are having only ‘rising interest rates’ globally. We are at higher liquidity conditions which are giving sudden spike to the inflation and were adding fuel to fire. So, the money regulators start taking the steps to control the excess liquidity in the system, which is very big negative factor for the earnings upgrade.
Regarding the Equity issue it is not decreasing, unfortunately it is increasing. It is because of the lot of QIPs and dis-investment which are diluting the equity which is also act as big negative factor for the earnings upgrade. Of course this is not that much worrying one as the above two but having the negative impact on the earnings upgrade.

2. In India, direct taxes and exports are dipping very sharply and fiscal deficit is too worrying. The most of the re-bound is coming from government spending only. Government spending can act as catalyst to the growth but not as the base element. Already oil and gas sector having very big problems like lower GRM’s, telecom is too saturated stage, and rising interest can spoil the profits of the financial companies/banks. So, most of the important sectors contributing the sensex are not going to see any big positive upgrades.
3. There is some news that in china too credit growth is not happening and is at the all time lows. This is a clear indication that re-bounding is ‘not strong as all were thinking’. Some of the analysts taking one more step and stating that China will have recession in 2010!
4. Dollar going to be weak in the upcoming quarters means more pain for the exporters like textiles and software sectors.
5. The global positive figures coming only because of the money pumped in to the system by the governments till now. Now, economies has to perform well to justify the growth numbers but unfortunately in US unemployment is still at all time high despite it is a lagging indicator to the economy. The time came to this to rebound but there is no such signal coming and the financial firms like banks are wiping process still continuing. In India, there is no comfort from the export end.
6. Investment/wealth creation is not all about stock market. In Japan, world’s largest economy too faced big hurdles from 1980. The markets are still down from their 1980 levels. Those who were invested in 1980 in Japan market are still sitting with huge losses, this tells the fact that stock markets are always not the safe investments. It’s all about the risk! For, Indian markets the term ‘CAUTIOUS’ is appropriate from my view. There are both the chances for going up and down from the current levels.

When this correction will happen?
Right now, there is no such big event to correct. Some more cues required for the correction to come to the conclusion to the above issues. The above issues are my own analysis and it is the question that whether it will happen or not? If my analysis is right then I think last quarter of this financial year or in the first quarter of the next financial year the big and deeper correction will happen. Till that time markets are in a range bound with positive bias. I am refereeing the term positive bias because of the some positive factors exists in the current environment and we can not compare it with the 2008 situation. The positive factors like huge FII inflows, stable government, insurance and banking reforms on the track etc.,

What to do now?
Now, we have come to the basics of the wealth creation. It’s the ‘asset allocation’. As I earlier said wealth creation is ‘not all about the stock markets’ its all about the ‘spreading the funds in various investment options’. Now, the stock markets trading at 52 week highs and gold at all time highs hence it is the time to cut down the exposure to the equities and should invest in to the fixed interest rate instruments (not the debt funds). I recommend to cut your exposure to equities (as upside capped and so much uncertainty is ahead) or book some profits at least 30%(Not less than). The remaining too should be invested in the locally depended companies such as infra, pharma etc., for very short term the markets can test the 5200-5300 levels use this positive move to book profits or to cut the equity exposure.

Stay ahead as always!

Happy investing

With thanks

Be and Make

http://stocktowin.blogspot.com